Carrefour Again Becoming Wal-Mart's Chief Rival

NEW YORK (TheStreet) -- The Wal-Mart (WMT) strategy of expanding overseas has a cautionary tale in Carrefour, the French-based discounter that has often gone where Wal-Mart feared to tread.

When in Chengdu, China almost five years ago, for instance, I stopped at a Carrefour, a Wal-Mart being unavailable. It was similar to the Wal-Marts of 20 years ago, with merchandise heaped up in bins, close together, prices advertised above, and crowds of shoppers pawing through everything.

Around that time we were reporting that Carrefour's sales were "slowing." Subsequently, that slowing turned into a rout, from which the company is only now recovering. Had I bought Carrefour stock back then, I'd have just about broken even by now. Wal-Mart, by contrast, is up 71%.

Global retailing is hard.

Even Carrefour recognizes that, because its latest strategy is focused on its "home" market of Europe, buying the malls where many of its "hypermarkets" sit.

This week the company announced it has put together a joint venture with private investors to buy 127 malls in France, Italy and Spain, throwing 45 malls it already owns in France into the pot, and taking 42% of the resulting deal.

The joint venture is paying 2 billion euros for the malls, and expecting 172 million euros in rent the first year, which my calculator calls a yield of about 8.6%. The hope is that by investing another 100 million euros per year into the properties the venture can bring that yield up.

The "hypermarket" concept is, as noted, very similar to Wal-Mart, which prefers greenfield sites for its stores. Carrefour's strategy of putting its markets into existing malls is similar to what Costco (COST) has been doing lately in the U.S.

How is that working out? Carrefour has been in "turnaround" mode for several years, suffering successive years of lower revenue that cost CEO Lars Olofsson his position early in 2012. Under Olofsson the stock had a hard fall in 2011, going from a high of about 36 euros to a low in the midteens.

His replacement is Georges Plassat, who has been selling operations in places like Greece and Columbia, focusing on more mature retail markets, where its sourcing and distribution channels may have an advantage.

This has powered the stock forward since his appointment, from about 13 euros to its present price of more than 27 euros.

Where all this comes together is back in China, where Carrefour has plans to open more than 20 new hypermarkets each year, and Wal-Mart has plans to open 110 outlets in the next three years, as we reported last month.

But China is no longer an underdeveloped market. The country has protected domestic incumbents, as it has in the Internet sector, so those incumbents are now well-entrenched. The leading player, Sun Art, has a 14% share of the big-store industry, against 11% each for Carrefour and Wal-Mart.

Wal-Mart plans to replicate its U.S. strategy in China, opening outside the big cities of Shanghai and Beijing, and building its own distribution infrastructure.

Carrefour is already inside those cities, building stores on top of its own parking garages, and has a total of 236 stores in the country.

Another key difference between the two is that Carrefour uses Chinese partners, 23 of them, to stay on top of local sourcing and selling trends. One of those trends is live seafood, with large "wet areas" that can become contaminated easily. Carrefour has four labs to test its products in major cities, and is building 45 minilabs for faster tests.

Which strategy will win China, the French or the American? Investors will be watching closely, because on that question may lie the fate of both stocks.